i Inflationista

Michael Panzner has just written
a piece highlighting Mike Shedlock's blog post which itself centered
around a letter received by Mish from a 'former member of the hyperinflation
is coming crowd'. I have received emails recently from readers about Mish's
views on deflation. I guess he could be described as a 'deflationist' as
could Michael Panzner - whose work we value and regularly publish at biiwii.com -
and of course Robert Prechter, a man who I have noted many times was a strong
influence on me; especially after I read Conquer
the Crash in 2002. These are all very smart and thoughtful men.

So with all that said, I do not take Michael Panzner's 'Inflationistas
Coming Around' lightly. I have permission from Mr. Panzner to publish
anything of his that I find of value and in this piece I find lots of value
because it gets to the heart of the matter; it gets to the definitions of
inflation and deflation. If you believe inflation is rising prices than of
course you believe deflation is declining prices. Here is a three year old
email I sent to Rick Ackerman - reprinted
on his site - in response to a provocative article Rick wrote on deflation.
It gets to the heart of why I am one of the 'Inflationistas'. Especially
these lines:

"In my view, the inflation game is played against the deflationary impulse
or need to correct. It is the Fed and other forces pushing on a string, and
one day they will find the string simply goes limp and all the inflated chickens
will then come home to roost...

"deflation (at least in capital flowing to the US manufacturing sector) has
been a good thing, driving progress and productivity; but it has been perverted
in recent years/decades to the point where it is cast as bad, while inflationary
policy is cast as good...

Deflation is a wellspring of progress and resulting lower prices that has
been poisoned by the easy money crowd."

The national (and global) front porch is loaded with chickens. Clucking, confused
birds with nowhere else to go. The Fed is 'pushing on a string' and talk of
deflation is growing by the week. In a genuine deflation 'scare', this needs
to happen. But when you define inflation as increasing money supply - similar
to that which Mr. Greenspan promoted earlier this decade, then that 'pushing
on a string' can only be inflation, regardless of what prices on most goods
and services do. The Fed is inflating and global policy makers stand ready
to fight the dreaded forces of deflation (in prices) as well, although many
developing regions are still dealing with the effects of the last inflation
- booming prices.

Recall that Greenspan's inflation regime took some time to take hold (credit
and housing bubbles) and it is far from a sure thing that today's policy makers
will be successful in keeping the bubble economy alive. But that does not change
the fact that we are in for a whopper of an inflation cycle. It's all in how
you define inflation. If the Fed is successful, gold will pick up on it before
positively correlated (to the economy) commodities and then under-perform as
it did in the middle of this decade. If the policy does not succeed, the collapse
predicted by the 'deflationistas' will indeed visit us, in which case there
will be a continued mad scramble for liquidity, which means cash and gold.
And one of those two will actually have intrinsic value in such a scenario.
But the point is that there will be massive inflation (by policy) even as the
collapse in credit and general liquidity continues.

I am not a gold bug. I would much rather be a sound US Economy bug. In fact
there are productive segments of the US economy that are fairing relatively
well and benefiting from inflationary policy even as the US financial sector,
arguably the former beneficiary of the greatest bubble (in confidence) of all
time, continues its collapse. This is a confusing time. This is not a drill.
It is time to get this right.

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